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10 July 2020
On 29 June 2020 the Department of Commerce and the Department of State announced that they were following through with changes to treat Hong Kong like China for exports of military and dual-use goods.
The Department of Commerce announced the suspension of regulations affording preferential treatment to Hong Kong over China, including the availability of export licence exceptions. This decision follows President Trump's remarks on 29 May 2020 which declared that Hong Kong was no longer sufficiently autonomous from China to warrant such preferential treatment. Trump stated that any suspension of Hong Kong's independent status would "affect the full range of agreements we have with Hong Kong, from our extradition treaty to our export controls on dual-use technologies and more, with few exceptions".
In a separate statement released on 29 June 2020, Secretary of State Mike Pompeo stated that "[t]he Chinese Communist Party's decision to eviscerate Hong Kong's freedoms has forced the Trump Administration to re-evaluate its policies toward the territory". Pompeo further noted that:
[a]s Beijing moves forward with passing the national security law, the United States will today end exports of US-origin defense equipment and will take steps toward imposing the same restrictions on U.S. defense and dual-use technologies to Hong Kong as it does for China.
Pompeo added that this decision was being made for national security reasons, because "[w]e can no longer distinguish between the export of controlled items to Hong Kong or to mainland China" and that "[w]e cannot risk these items falling into the hands of the People's Liberation Army, whose primary purpose is to uphold the dictatorship of the [Chinese Communist Party] by any means necessary".
The impetus for these measures was China's proposal to pass a controversial national security law affecting Hong Kong, which Beijing's top legislative body finally passed on 30 June 2020. The law gives China new powers over Hong Kong and prohibits acts of secession, subversion, terrorism or collusion with a foreign country or 'external elements' that endanger national security.
In his 29 June 2020 statement announcing the rollback of Hong Kong's preferential treatment, US Secretary of Commerce Wilbur Ross noted that:
[w]ith the Chinese Communist Party's imposition of new security measures on Hong Kong, the risk that sensitive U.S. technology will be diverted to the People's Liberation Army or Ministry of State Security has increased, all while undermining the territory's autonomy.
Ross stated that the United States was unwilling to accept these risks, resulting in the revocation of Hong Kong's "special status". Ross's announcement ended by urging "Beijing to immediately reverse course and fulfill the promises it has made to the people of Hong Kong and the world". Ross also announced that further actions to eliminate differential treatment were being evaluated.
On 30 June 2020 the Bureau of Industry and Security (BIS) published a follow-on notice stating that all licence exceptions for Hong Kong that provide differential treatment to Hong Kong other than those available to China are suspended effective immediately. However, there is a savings clause for items already en route as of 30 June 2020 pursuant to an order. Further, to the extent that a licence exception was being used for deemed exports/re-exports to Hong Kong persons, that authorisation can continue to be used until 28 August 2020. After that time, a licence will need to be obtained. BIS notes that it is taking the action due to the new security measures, but adds that there is increased risk of diversion of items from Hong Kong to the Chinese military, Iran or North Korea.
Hong Kong currently has a separate entry on the Commerce Country Chart in Supplement 1 to Part 738 of the Export Administration Regulations (EAR). The BIS website states that:
[t]he United States-Hong Kong Policy Act of 1992 (Public Law 102-383, 106 Stat. 1448, Oct. 5, 1992) allows the United States to continue to treat Hong Kong separately from Mainland China for matters concerning trade and export control.
Until now, Hong Kong had received favourable treatment regarding US. export licensing and regulations because it is a cooperating country with multilateral export control regimes.
Following Beijing's proposed plans to approve a national security law that would threaten Hong Kong's national autonomy, the Department of Commerce is now following through with Trump's threat to stop treating Hong Kong as autonomous for export control purposes.
The impact of this rule change will be significant. As noted above, the most immediate affects will be to licence exception availability as follows:
Additional changes to the EAR to remove the differential treatment for Hong Kong could include the following (but note that there have not yet been clear-cut announcements from the administration that these changes are in effect):
Further, items controlled under .y entries of the 500 and 600 series entries on the Commerce Control List (eg, 3A611.y items) would require a licence for exports to Hong Kong.
The rollback of favourable treatment:
For further information on this topic please contact Kay C Georgi, Regan K Alberda or Sylvia G Costelloe at Arent Fox LLP by telephone (+1 202 857 6000) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Arent Fox LLP website can be accessed at www.arentfox.com.
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